Investing your money is essential if you want to be able to retire comfortably or send your kids to college, but there is also risk involved in most investments that have long-term growth potential. If you’re someone who has a low risk tolerance, you may be wondering what low risk investments can help you grow your money without taking more risk than you want to take.
Addition Financial members often come to us to talk about investment opportunities and the topic of risk is one that’s frequently mentioned. Whether you’re interested in short term investing or long term investing, it’s useful to know about low-risk investments other than stocks. Here are eight to consider.
There are many investment strategies that can help you build wealth or save for retirement. You can invest in stocks, real estate or businesses, all of which carry some amount of risk. But what are the benefits of investing in low-risk options that aren’t stocks? Here are some things to keep in mind:
These benefits illustrate why some people prefer to stick with low risk investments.
There are some potential disadvantages to choosing a low-risk approach to investing. Here are a few things to consider:
You will need to balance the potential disadvantages of investing in low-risk options against the potential benefits.
If you want to explore low-risk investments as you build your investment portfolio, here are eight ways to invest money other than stocks.
A money market mutual fund, or a mutual fund, should not be confused with a money market account, which is a type of high-yield savings account. Instead, it is an investment fund that invests in near-term investments with low risk. (A near-term investment is an investment that’s meant to be held for a short time. An example would be a bond that was close to its maturity date.)
Money market mutual funds may include investments in cash, cash-equivalent securities, bonds, or high-credit-rating debt-based securities. An example of the latter would be United States Securities.
A certificate of deposit, or CD for short, is a type of investment where the owner of the certificate earns interest on a lump sum for a specified period. A CD may be viewed as a savings vehicle but where it differs from a traditional savings account is that you’ll typically get a higher interest rate with a CD than a savings account and the funds are not liquid until the CD reaches maturity. Credit unions offer term share certificates, which perform similarly to CDs traditionally issued by retail banks.
For example, you might buy a CD for $5,000 and need to leave it alone for a year. During that year, your credit union or bank would compound interest and add it to your balance according to their terms. As a rule, you’ll earn more money as the term of the CD increases.
Bonds offer investors the opportunity to loan money to a government (such as the federal government or a state government) or a municipality. These bonds typically carry a low risk because the likelihood of a government failing or going bankrupt is low.
Some government bonds are even indexed to inflation, which means you’ll have protection in periods of high inflation. The money you invest in a government bond that’s indexed to inflation won’t lose spending power over the term of your investment. Treasury bonds are typically sold in terms of 20 to 30 years.
Corporate bonds have a lot in common with government bonds in that they represent an opportunity for an investor to loan money to a company by purchasing a bond. The biggest difference is that you’d be investing in a company and not in a government.
Keep in mind that corporate bonds may be low risk but they do carry more risk than a government or municipal bond would. They are not usually indexed to inflation but they can represent a happy medium between buying stock and pursuing low risk investments, instead.
If you want some of the benefits of investing in the stock market but want to keep your risks low, one option is to invest in a dividend index or a dividend ETF (exchange-traded fund.) These investments minimize risk by spreading the investment over multiple stocks.
By choosing an index or fund of dividend-paying stocks, you’ll be able to earn regular income from your investments while diversifying your portfolio and avoiding risk. There’s far less risk investing in an index than there would be in purchasing stock in a single company.
A real estate investment trust, or REIT, provides a way to invest in real estate without taking on the substantial expense of buying real estate on your own. These trusts may finance and/or own various types of real estate including residential real estate, rental properties, infrastructure or commercial properties such as office parks and warehouses.
One of the best things about REITs is that they are legally required to pay out a minimum of 90% of their profits in dividends. They are publicly traded, so there is also the potential to earn long-term returns on your investment.
Treasury notes such as United States Securities, which are also known as T-Bills, have a lot in common with government bonds. They are sold to investors at a discount from the face value and when the bill reaches maturity, the investor receives the full face value of the bill.
Treasury bills are sold in terms ranging from two years to 10 years. If you purchase treasury notes, you’ll get interest payments every six months.
A dividend checking account pays dividends to the account holder instead of interest. They are available only at credit unions because credit union members are also owners; the dividends represent members’ shares of the credit union’s profits. In most cases, these dividends are higher than the interest rates you would earn at a bank.
Dividend-bearing accounts are not associated with many risks, but there may be a minimum balance required before the credit union will pay dividends. For example, our Benefits Checking requires a minimum balance of $1,000 to earn dividends.
One of the topics that comes up most frequently when we talk about low-risk investments is their growth potential. If you’re saving to buy a home, send your kids to college or your own retirement, it’s important to understand what the investments you make now mean for your future.
Stock market investments may have unlimited growth potential but they also come with the potential for significant losses. It goes without saying that people who invested in huge companies such as Apple or Amazon in the early days of their existence and held onto their stock have made impressive gains on their initial investment.
With low-risk investments, the growth potential is significantly less and that’s the trade-off investors make by choosing them. If you have low-risk investments in your portfolio, you’re trading the potential for massive gains for the security and peace of mind of regular returns, possibly in the form of dividends.
It’s for this reason that some investors, even those who are risk averse, choose a mix of investments. As a rule, young people can afford to take more risk than older people who are closer to retirement. You may want to consider putting some of your money into high-risk investments such as stocks to create balance in your portfolio.
If you’re not a fan of taking chances with your money, then choosing an investment strategy that minimizes risk and maximizes stability may be the right choice for you. The eight low-risk investments we’ve listed here can help you get started.
Did you know you can earn dividends simply by opening a checking account? Addition Financial has what you need. Click here to read about our Benefits Checking account and join today!